An undisclosed principal generally refers to a principal person whose existence is unknown to the third party with whom the agent deals and so, in the eyes of the third party, the agent is the principal. Common law doctrine on undisclosed principals confers rights and imposes liabilities on the undisclosed principal, notwithstanding that he is not made a party to the relevant contract. This doctrine is an exception to the general rule that only a party to a contract may sue and be sued thereon. The rules under this particular doctrine may be illustrated by considering the respective relationships between the principal and the agent, the principal and the third party, and the agent and the third party.
According to Section 231, if an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principle may require the performance of contract.
The rules governing the rights and liabilities between the undisclosed principal and the third party are as follows[iii]:
Rights of an Undisclosed Principal:
- An undisclosed principal remains liable to a third party for the price of goods sold or services provided under the contract made in the agent’s name with the third party. The undisclosed principal’s liability will not be discharged even if he has made payment to the agent with instruction that the agent pays over the same to the third party, if the agent fails to pay the third party as instructed.
- Where the existence and identity of the principal is disclosed and where the third party is to take action for recovery of any amount payable to him under the contract, the third party can elect to sue either the undisclosed principal, or the agent.
- There are cases when an undisclosed principal may not sue or be sued by the third party under the contract made between the agent in the agent’s name and the third party. A major category is where the identity of the party in a contract is material. The following are examples of such cases:
- A promise by the third party to lend money to the agent personally cannot be enforced by an undisclosed principal.
- A contract involving a strictly personal skill or service cannot be performed by an undisclosed principal. For example, a contract for a picture painted by a named painter or a concert performance by a named artist cannot be performed by an undisclosed principal, as such performance involves the personal identity and skill of the agent which induces the third party to enter into the relevant contract with the agent.
- Where the landlord is induced by the identity, creditworthiness and reputation of the tenant (who is in fact an agent) to enter into a tenancy agreement with him, an undisclosed principal may not be able to replace the agent as tenant under the tenancy.
- If the undisclosed principal or agent is aware that the third party will not contract with the undisclosed principal for whatever reasons, the undisclosed principal can not make use of an agent to procure the contract with the third party.
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